Market Temperature: Nippy

Adios, Au Revoir, Farewell 2009. (And Good Riddance!)

By  Audra M. Szollosy

At the start of 2009, agencies were at a crossroads, not knowing whether to buy, sell or implement new or improved organic growth strategies. The path was uncertain, but it was widely believed M&A activity would continue at a brisk pace throughout 2009 as it did in 2008.

Instead, announced transactions were at the lowest levels in six years and the second least active of the decade. Total deal count was 185 compared with 307 in 2008, a 40% decline. As expected, both public and privately held brokerages continued to lead consolidation efforts with 131 deals. Trailing far behind were insurance and financial service companies, with just 33, and banks, with just 21—the lowest in 10 years.

Brown & Brown, which has historically been the most active acquirer each year, was surpassed for the first time since 2000 by Arthur J. Gallagher. The top six most active acquirers were Gallagher (11), Hub International (9), Brown & Brown (8), Marsh & McLennan (7), and—tied for fifth place—(6 each) Wells Fargo Insurance Services and Ascension Insurance. These six brokerages accounted for 25% of M&A last year.

Buyer demand picked up in December with 25 deals, but it was weak all year for five main reasons:

• Uncertainty about the economy
• The threat of nationalized healthcare
• Instability in the credit markets
• Bank focus on strengthening balance sheets and increasing stock prices
• Lack of capital and increased cost of debt, which reduced private equity group activity.

Another factor affecting M&A was transaction valuation multiples. Valuations fell from 2008 and created a significant valuation gap between buyers and sellers. Many sellers took a wait-and-see approach, waiting for valuations to increase and seeing if a buyer would pay their asking price.

Clearly, the threat of nationalized healthcare and the broader prospect of overall healthcare reform greatly affected acquisitions of employee benefit agencies. There were 43 benefits deals in 2009 versus 99 in 2008—a decline of 57%. Some buyers completely took a pass while others cautiously moved forward with deals in the works.

January is typically a very active month, but average activity stayed the course with 16 deals. Insurance brokerages accounted for 15. For the most part, banks will play a minor role in brokerage consolidation going forward, with the exception of Wells Fargo and BB&T.

Not all is dim, as the outlook for 2010 M&A activity looks rosy. Buyer demand and seller supply should both increase as the economy improves and answers surrounding healthcare reform become clearer. The valuation gap should narrow as valuations increase slightly and sellers better accept and understand current valuation multiples. The transformation of the healthcare distribution model, a pending rise in the capital gains rate, the ever-increasing age of the average, independent agency owner, and the inability to perpetuate internally, along with several other variables, will continue to drive consolidation.